“Around $1.7 trillion of write-downs in toxic assets still expected”

Stephen Roach of Morgan Stanley maintains that recovery in global economies remains weak. While sounding cautious on Asian revival, he remains positive on India

In a frank discussion on global economic trends, Asian markets and the Indian economy, the chairman of Morgan Stanley Asia, Stephen Roach, submitted that global economies still remained at a delicate point and that recovery would take a much longer time.

He was sceptical of the huge rally in the stock markets that caught everybody by surprise last year. “We had a very strong recovery in the stock markets in the final nine months of 2009. In my view, the markets got ahead of themselves in predicting the strong and vigorous recovery in the US economy. I have been consistently cautious on global economies in this post-crisis period and remain so. Even though the worst is over, it does not mean that we are in for a vigorous recovery.”

Speaking about the spectacular show put up by some Asian economies after the crisis, Mr Roach said, “There is more that needs to be done by Asia to assume the role as a growth engine and leader of global economic growth. The Asian model remains very much dependent on exports and external demand. India is an exception to that. But for the most part, Asia follows this model, which is difficult to sustain in this post-crisis period. Weak recovery in global markets means that external demand will remain under pressure for some time to come.”

He added that Asian countries need to rebalance their models so that they can sustain growth through internal demand also, highlighting India’s position in that respect. Indeed, except for India, the share of exports in the GDP of developing Asian economies has been steadily rising while that of domestic consumption has been on the decline. “India is a good example of what better balance can do. Asia is a region which is most dependent on global growth over the last three decades. It has not and will not decouple from the global economy until the export dependence diminishes,” Mr Roach added.

Cautioning that recovery still remains weak, Mr Roach said, “The conventional view that got built into the markets was that deep recession means a sharp rebound—the classic ‘V’ shaped recovery. But I am not of that view at all.” He stressed that the lingering financial crisis, the synchronicity of the global recession and imbalances within Asia called for more caution and restraint. “IMF estimates suggest that by the time all toxic assets are written down, the total global write-downs will amount to around $3.4 trillion. Thus far, only half of that has been written down.”

He pointed to the delicate situation prevailing in the US to bring home his point about the tepid recovery process. “Unemployment in the US is in a horrible situation. Although figures suggest that unemployment is at 9.7%, the actual figure is much higher than that (about 11.4%), given that some workers are not even looking to get a job.”

Mr Roach, however, sounded more confident about India’s growth story. He even stated that for the near term, he remained slightly more bullish on India than China, given the more balanced nature of India’s economy. However, he highlighted some concerns that threaten to dampen India’s steady growth. “Dependence on foreign capital and infrastructure constraints need to be addressed immediately,” he said.

When asked about his expectations from the upcoming Union budget, Mr Roach said, “In the area of fiscal consolidation, I am hopeful that the government will target around 5.5% of GDP by the fiscal year ending 2011, which would represent about 1.3% reduction in fiscal deficit. This is the time for fiscal consolidation, when the economy is strong. There is a need to focus on a timely exit strategy.”

He was also hopeful of more announcements on the divestment front, tax reforms and infrastructure investments.

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